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Employment Contracts - Why Do You Need Them?

At the core of every employment relationship is the employment contract. The employment contract is a binding agreement between two parties in which an individual agrees to perform work in return for payment.

As with any contract, the law requires certain conditions to be met before it will recognise an employment contract. Those conditions are:

  • There must be an offer of employment which is accepted by the prospective employee;
  • Each party must provide consideration in return for the obligations undertaken by the other party
  • The parties must have intended to enter into a legal relationship

So, what is the best practice approach to developing employment contracts that will protect the needs of your business?

Do employment contracts have to be in writing?

A contract can be in writing or verbal.

While it is strongly recommended that a written agreement always be put in place when engaging an employee, in the absence of such a document, an employment contract can develop based on the conduct of the parties (ie. if someone is performing duties for your business, excluding genuine contractors, it is more than likely that an employment contract exists).

Regardless of whether a written or verbal employment contract is in place, there are a number of a number of implied duties that exist for both parties to an employment relationship. These duties include:

  • The requirement for an employee to follow lawful and reasonable directions;
  • The duty of fidelity;

The duty of an employer to provide a safe working environment.

Why have a written employment contract?

Regardless of whether you are a small, medium or large business, it is essential that a well-drafted employment contract be in place for every employee.

A written employment contract will help to ensure that the rights and obligations of each party are clearly understood. This will help reduce the risk of any misinterpretations or misunderstandings which could potentially put the business at risk.

What should be included in a written employment contract?

Where an employee is covered under a Modern Award or Enterprise Agreement, that Award / Agreement will establish the minimum wages and working conditions of the employment. The Award/Agreement will operate in conjunction with the employment agreement.

The terms of an employment agreement are also subject to the National Employment Standards (NES).

While an Award/Agreement and the NES will set out details of the employee’s working conditions and entitlements, the employment agreement will set out the specific details relating to an employee’s engagement. Such details should include:

  • Employment type (Fixed Term, Full Time, Part Time, Casual etc)
  • Commencement date
  • Period of employment if fixed-term
  • Agreed hours of work, and when the work is to be performed
  • Location of work
  • Agreed remuneration
  • Payroll Frequency
  • Probationary Periods (where applicable)
  • The requirement to hold any specific industry licenses or professional registrations which are required to perform the role
  • Post Employment Restraints
  • Confidentiality Provisions and Intellectual Property

Employment contract wording and language does not need to be complicated or legalistic. The simpler and plainer the language used, the more easily the contract can be understood by all parties.

What should not be included in an employment contract?

The employment agreement should not contain any provisions which are ambiguous, contradictory, discriminatory or that are non-compliant to law or an applicable industrial instrument.

It is recommended that the following provisions are not included within an employment contract. Should you choose to include such provisions, they will become binding contractual terms to which you could be legally bound to:

  • Explicit details of bonus or incentive schemesWhile an employment agreement could refer to an employee being eligible to participate in a bonus/incentive scheme, it should be made clear that any such scheme is discretionary. Where a bonus or incentive is expressly included in the contract, as an employer, you may not unilaterally vary or remove the bonus.

    It is recommended that specific details relating to the bonus/incentive scheme be documented in a policy or separate document (again which clearly sets out that it is a discretionary bonus/incentive).

  • Policies or proceduresAlthough workplace policies and procedures are essential documents to have in place, they should not be incorporated into the terms of an employment agreement. If the policies are included as a contractual term, as an employer, you would be unable to vary or terminate the policy without obtaining the agreement of the employee.

     While a provision setting out the requirement to comply with company policies can be included, it          should be clearly stated that the policies do not form part of the employment contract.

As the Employer, can I change an employment agreement?

An employment agreement can only be varied by consent between the employer and an employee (i.e an employer cannot unilaterally change an employee’s employment agreement without the employee’s consent).

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